RBI's explanation to govt on inflation likely to cover these three broad areas

The Reserve Bank of India (RBI) has called a special meeting of the six-member monetary policy committee (MPC) on November 3 to discuss the report for breaching the inflation target for three consecutive quarters. This report will be submitted to the government as per the inflation-targeting mandate given to the RBI. 

The members will discuss the content of the letters which will cover three broad areas. 

First, the RBI has to explain the reasons for missing the target. The CPI, or retail inflation, which the RBI tracks for setting interest rates, has been above 6 per cent from January to September this year. It closed at 7.41 per cent in the month of September 2022. The big reason for RBI missing the inflation target is the Russia-Ukraine conflict in February this year. 

The war severely impacted the supply chain and pushed up oil and food prices. The higher global inflation also pushed up interest rates, which impacted the currencies across emerging markets. The strengthening of dollar and rupee depreciation has increased the imported cost of oil and many imported items. The RBI's letter to the government will have the Russia-Ukraine event as a major reason for breaching the target.

Second, the RBI has to give the action plan or the corrective action it proposes to take in the coming months. The RBI is likely to announce a plan to withdraw the liquidity more aggressively as the average daily surplus liquidity in the system is still between Rs 2-3 lakh crore. 

The MPC has previously stated that it would continue to withdraw accommodation in order to keep inflation within the target range while supporting growth. In addition, the rate hikes in repo rates will continue in the coming December policy. The RBI has already hiked the repo rate by 190 basis points to 5.90 per cent this year to contain the inflationary pressure.

Third, the RBI has to give a timeline for reverting to the inflation target of 4 per cent with an upper tolerance limit of 6 per cent. In fact, the RBI's projection for inflation is 6.7 per cent for 2022-23. The RBI's own assessment is that inflation will fall below 6 per cent by the fourth quarter of 2022-23. It expects it to touch 5.8 per cent by December 2022. CPI inflation is expected to fall further to 5.0 percent in the first quarter of next year i.e  2023-24. The RBI is likely to stick to these timelines in its response to government.